Encouraging DC schemes to invest in illiquid assets

April 2022

The latest chapter in the government’s campaign to encourage investment by pension schemes in illiquid assets, including infrastructure, has been the DWP’s recent publication of a consultation response and draft regulation. 

The DWP’s recent publication of a consultation response and draft regulations covers:

  • A new requirement for trustees of relevant DC schemes to disclose their policy on illiquid assets in their default SIP;
  • A new requirement on DC schemes with assets of over £100m to disclose the allocation between different asset classes in the default fund;
  • A concession exempting large master trusts from most of the employer-related investment restrictions; and
  • The DWP’s response to consultation on exempting performance fees from the DC charges cap and promoting greater consolidation in the DC market.

Disclose and explain: illiquid assets policy in the SIP

Trustees of relevant defined contribution (DC) schemes (broadly DC schemes other than additional voluntary contribution (AVC) only arrangements) will be required to disclose and explain their policies on illiquid investments in their statement of investment principles (SIP).  At present, the DWP’s proposals apply only to default arrangements of occupational DC schemes. For hybrid schemes, the requirements will apply only to the DC section.

The DWP expects an average illiquid assets policy statement to be between one and three paragraphs long. The statement should include:

  • An explanation of what illiquid assets are;
  • Whether the trustees choose to invest in illiquid assets;
  • Which members will be holding illiquid assets;
  • A description of allocations to illiquid assets, including whether the investments are held directly or indirectly, plus the asset classes of those investments;
  • Why the trustees have decided to allocate to illiquid assets (or why not) and the factors considered in reaching this decision;
  • A description of any current barriers to investment in illiquid assets; and
  • Any future plans for investment in illiquid assets.

The intention is that trustees should review their illiquid assets policy statement in line with requirements for reviewing the SIP, so at least every three years and without delay after any significant change in investment policy.

DC schemes with assets of over £100m: disclosure of asset allocation

A further requirement will be imposed on trustees of DC schemes with assets of over £100m and which are required to produce a chair’s statement. Such schemes will be required to disclose the percentage of assets allocated in its default fund to each of: cash, bonds, listed equities, private equity, property, infrastructure and private debt. The disclosure should be made annually in the chair’s statement and made public. Guidance is expected on how trustees should disclose the information, including age-specific disclosures where applicable.

When testing whether the £100m asset threshold is met, the total assets linked to the latest version of the audited accounts should be used. For hybrid schemes, total assets will be considered, so including the value of defined benefit (DB) assets.

Employer-related investments (ERI): concession for master trusts

Regulations in force on 1 October 2022 will provide a welcome exemption for large master trusts (those with 500 or more participating employers of active members) from some of the ERI restrictions applicable to occupational pension schemes. Broadly, the ERI restrictions will apply only to investments relating to the scheme funder or scheme strategist (or their connected or associated persons).

This is a very sensible development, as the current ERI restrictions do not work in the context of large master trusts with many participating employers.

Exempting performance-based fees from the charges cap

The DWP received a mixed reaction to its consultation in November last year on excluding performance-related fees from the DC charges cap. Accordingly, it intends to take time to “fully understand all concerns and engage further” and will consult on principles-based draft guidance alongside consultation on any draft regulations.

Consolidation of the DC market

The DWP has been urged to slow down its encouragement of greater consolidation in the DC market. The DWP’s call for evidence in summer 2021 led to industry concern at disruption within the market if consolidation is forced too quickly. The recent consultation response makes clear that the government will not be introducing any new regulatory requirements with the sole purpose of consolidating the market in 2022. Instead, the DWP intends to work closely with the Pensions Regulator to monitor the impact of the value for members assessment and to focus on creating a value for money framework.


Authored by the Pensions Team.


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